A ground-breaking proposal by the Islamic Development Bank to spin off its trade finance operations into a dedicated export-import bank has received strong backing from the international trade finance community.
The new institution, to be known as the International Islamic Trade Finance Corporation (ITFC), is set to receive unanimous backing by the IDB governing board in Kuwait this week, IDB president Dr Ahmed Mohamed Ali told Emerging Markets in an exclusive interview.
“We are still not satisfied with the progress of inter-state trade in our region,” Dr Ali said. “The new institution will be a great thing for enhancing trade between Islamic countries.”
The proposed body “is an excellent move as the Islamic community can increase trade between member countries,” said Asad Zafar, managing director of the asset finance advisory group, HSBC Amanah.
The IDB’s plan to set up a stand-alone entity with $1 billion in starting capital sends a clear message to Islamic financiers that trade is a top priority, market observers say. The IDB will remain a majority shareholder in the new institution.
“It’s a good story – and reflects the growth and maturity of trade finance under the IDB’s wing,” said Diana Smallridge at International Financial Consulting, which has worked with development banks involved in the trade finance sphere. “Lots of banks are happy to support trade between the EU and the Middle East, but the IDB can play a crucial role in facilitating trade between countries like Bangladesh, Syria and Mauritania. That’s where the main need is, the developing countries,” she stressed.
One banker, who preferred not to be named, applauded the development bank for addressing the challenges of its growing trade finance portfolio in this way. “This will sharpen them. They are now subject to the vicissitudes of the market” he said.
A new trade finance bank “makes sense because a stand-alone entity will be more focused,” notes Smallridge. She highlights that the challenge for a classic development bank to be operating in trade is that the types of transactions, and thus the operations and even culture, are different between long-term development finance and short-term trade finance. “Development finance is typically left to sovereign borrowers and can be lengthier and more complex,” she explains.
IDB president Dr Ali pointed out that increasing the bank’s relevance to the private sector is one of the major challenges facing the IDB. “If other multilateral institutions face that challenge, then IDB confronts the challenge even more,” he stated.
“One of the main challenges is that [IDB countries] have not always been able to attract direct investment from the private sector. What they are getting is negligible.”
Dr Ali pointed out that a capital increase is already on the cards. “We do hope we can have more active cooperation...”
Is there any risk that the new IDB arm will crowd out commercial banks? “Just the opposite – by leveraging the IDB’s preferred creditor status, it can bring new banks into intra-regional trade,” Smallridge predicted.
There is certainly “significant liquidity” among Islamic institutions, said Naveed Khan, managing director at ABC Islamic Bank. He sees the new IDB entity as “a complement to business being transacted by commercial banks”.
“Based on the typical trade finance transactions that we have seen IDB engage in, there isn’t a significant financing hole these creditworthy entities face as such,” he said.
But in terms of the IDB’s growing syndicated lending activity – paralleling the A/B-loan structures apparent at the IFC, EBRD and other multilaterals - “participation from other financial institutions is greatly enhanced by virtue of the presence of the IDB”, Khan said.